Fitch cuts Cyprus sovereign credit rating to ‘B’

FITCH RATINGS has cut the Cyprus sovereign credit rating two notches to ‘B’ from ‘BB-minus’ amid concerns that the government’s support for the islands troubled banks could cost more than previously thought.

In a statement issued last evening, Fitch said that “Uncertainty regarding the capital needs of the cooperative banks still remains. Including the latter, the total recapitalization costs of the banking sector could be up to €10 billion, although Fitch anticipates that this figure may include a degree of headroom.”

That would push the size of the rescue package that Cyprus is trying to finalize with the other 16 European Union countries that use the Euro and the International Monetary Fund to over €17 billion.

The credit outlook on the government remains negative. Fitch said this is a reflection of “continued policy uncertainty” over a financial bailout package being prepared with the Eurozone.

According to Fitch, that would drive the country’s debt load to over 140 per cent of its annual gross domestic product, 20 percentage points more than the agency had previously estimated.

Fitch also notes that: “Negotiations between the Troika and the authorities have been protracted and are still on-going, with lingering uncertainty about the timing and details of an EU-IMF rescue programme.”

Outgoing Euro Group President Jean-Claude Juncker has said that a March decision on the bailout is possible.

Government spokesman Stephanos Stephanou said that the new downgrade proves once again that the banks’ recapitalisation is the root of the problems behind the island’s ailing economy.

The draft Memorandum of Understanding between Cyprus and international lenders on the state of the island’s banking sector notes that: “many of the problems for the sector are home-grown and relate to over expansion in the property market as consequence of banks’ poor risk management practices.”